Food and beverage adds weight to hotel revenues - Views on News from Equitymaster

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Food and beverage adds weight to hotel revenues

May 19, 2000

Traditionally room income has dominated the revenues of five star hotels. However over the past few years due to decline in occupancies and average room rates this has changed as hotels have been faced with decline in room income. Hence to beef up their income levels they have been consistently trying to increase income from food and beverage activities. Besides increasing revenues from airline catering now the larger hotel companies have been trying to increase the revenues from institutional catering, sprucing and opening of specialty restaurants, incentive schemes like discounts on their food and beverage outlets. As a result of the above food and beverage income has started assuming an important place in the revenue models of hotel companies.

From the early 90's to the mid 90's, for the large hotel chains food and beverage income accounted for around 20% -25% of total operating income, however since the past 3-4 years this has changed and food and beverage income now accounts for close to 35%-40% of the operating income of hotel companies.

However this ratio is again expected to change over the next two to three years as occupancy rates and average room rates will see good growth due to the benefits of an improved economic scenario and rise in foreign direct investment. Also in a good year for hotels, margins are higher from income from rooms rather than from food and beverage as this segment has higher variable costs.

On valuation terms, Indian Hotels Company Ltd is trading at a price to earnings multiple of 8.4x and EIH Ltd is trading at 6.4x (both on FY99 earnings). This is low as compared to multiples of 20x-25x they traded at few years ago and negativity's facing the hotel industry all seem to be in the price.

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